There still might be time to cut your tax bill with IRAs

 

If you’re getting ready to file your 2019 tax return, and your tax bill is higher than you’d like, there may still be an opportunity to lower it. If you qualify, you can make a deductible contribution to a traditional IRA right up until the Wed., April 15, 2020, filing date and benefit from the resulting tax savings on your 2019 return. For 2019 if you’re qualified, you can make a deductible traditional IRA contribution of up to $6,000 ($7,000 if you’re 50 or over). To be qualified, you must meet rules involving your income and whether you’re an active participant in an employer-sponsored retirement plan.

Watch out for tax-related scams 

Victims of tax-related scams can be contacted through regular mail, phone calls and email. If you receive a text, letter, email or phone call purporting to be from the IRS, keep in mind that the tax agency never calls taxpayers demanding immediate payment using a specific method of payment (such as a wire transfer or prepaid debit card). The IRS generally mails bills or notices to taxpayers and gives them time to respond with questions or appeals. The tax agency also doesn’t threaten taxpayers with arrest. In addition, the IRS doesn’t initiate contact by email, text message or social media channels to request information. 

 

Can you deduct charitable gifts on your tax return?

Many people who used to claim a tax break for making charitable contributions are no longer eligible. That’s because of some tax law changes that went into effect a couple years ago. You can only claim a deduction if you itemize deductions on your tax return and your itemized deductions exceed the standard deduction. Today’s much higher standard deduction combined with limits or suspensions on some common itemized deductions means you may no longer have enough itemized deductions to exceed the standard deduction. If you do meet the rules for itemizing, there are still other requirements to claim a charitable deduction.  Itemizing saves tax only if itemized deductions exceed the standard deduction. Through 2025, the TCJA significantly increases the standard deduction. For 2020, it is $24,800 for married couples filing jointly (up from $24,400 for 2019), $18,650 for heads of households (up from $18,350 for 2019), and $12,400 for singles and married couples filing separately (up from $12,200 for 2019). Tax Strategy - You might, however, be able to preserve your charitable deduction by “bunching” donations into alternating years. This can allow you to exceed the standard deduction and claim a charitable deduction (and other itemized deductions) every other year.

 

 

The tax aspects of selling mutual fund shares

The tax rules involved in selling mutual fund shares can be complex. If you sell appreciated mutual fund shares that you’ve owned for more than one year, the profit will be a long-term capital gain. As such, the top federal income tax rate will be 20% and you may also owe the 3.8% net investment income tax. One difficulty is that certain mutual fund transactions are treated as sales even though they might not seem like it. For example, many funds provide checkwriting privileges. Each time you write a check on your fund account, you’re selling shares. Another problem may arise in determining your basis for shares sold.

If you save for retirement with an IRA or other plan, be aware there’s a new law that makes several changes to these accounts. For example, the SECURE Act repealed the maximum age for making traditional IRA contributions. Before 2020, traditional IRA contributions weren’t allowed once you reached age 70½. Starting in 2020, an individual of any age can make contributions, as long as he or she has compensation. The required minimum distribution age was also raised from 70½ to 72. In addition, penalty-free withdrawals up to $5,000 are now allowed from a retirement plan for birth or adoption expenses. These are only some of the new law changes. Questions? Don’t hesitate to contact us.

Answers to your questions about 2020 individual tax limits

 

Right now, you may be more concerned about your 2019 tax bill than you are about your 2020 tax situation. That’s understandable because your 2019 individual tax return is due to be filed in less than three months.

However, it’s a good idea to familiarize yourself with tax-related amounts that may have changed for 2020. For example, the amount of money you can put into a 401(k) plan has increased and you may want to start making contributions as early in the year as possible because retirement plan contributions will lower your taxable income.

Note: Not all tax figures are adjusted for inflation and even if they are, they may be unchanged or change only slightly each year due to low inflation. In addition, some tax amounts can only change with new tax legislation.

So below are some Q&As about tax-related figures for this year.

How much can I contribute to an IRA for 2020?

If you’re eligible, you can contribute $6,000 a year into a traditional or Roth IRA, up to 100% of your earned income. If you’re age 50 or older, you can make another $1,000 “catch up” contribution. (These amounts are the same as they were for 2019.)

I have a 401(k) plan through my job. How much can I contribute to it?

For 2020, you can contribute up to $19,500 (up from $19,000) to a 401(k) or 403(b) plan. You can make an additional $6,500 catch-up contribution if you’re age 50 or older.

I sometimes hire a babysitter and a cleaning person. Do I have to withhold and pay FICA tax on the amounts I pay them?

In 2020, the threshold when a domestic employer must withhold and pay FICA for babysitters, house cleaners, etc. is $2,200 (up from $2,100 in 2019).

How much do I have to earn in 2020 before I can stop paying Social Security on my salary?

The Social Security tax wage base is $137,700 for this year (up from $132,900 last year). That means that you don’t owe Social Security tax on amounts earned above that. (You must pay Medicare tax on all amounts that you earn.)

I didn’t qualify to itemize deductions on my last tax return. Will I qualify for 2020?

The Tax Cuts and Jobs Act eliminated the tax benefit of itemizing deductions for many people by increasing the standard deduction and reducing or eliminating various deductions. For 2020, the standard deduction amount is $24,800 for married couples filing jointly (up from $24,400). For single filers, the amount is $12,400 (up from $12,200) and for heads of households, it’s $18,650 (up from $18,350). So if the amount of your itemized deductions (such as charitable gifts and mortgage interest) are less than the applicable standard deduction amount, you won’t itemize for 2020.

How much can I give to one person without triggering a gift tax return in 2020?

The annual gift exclusion for 2020 is $15,000 and is unchanged from last year. This amount is only adjusted in $1,000 increments, so it typically only increases every few years.

Your tax picture

These are only some of the tax figures that may apply to you. For more information about your tax picture, or if you have questions, don’t hesitate to contact us.

Does your employer offer a 401(k) or Roth 401(k) plan? Contributing to it is a taxwise way to build a nest egg. If you’re not already socking away the maximum allowed, consider increasing your contribution between now and year end. With a 401(k), an employee elects to have a certain amount of pay deferred and contributed by an employer on his or her behalf to the plan. The contribution limit for 2019 is $19,000. Employees age 50 or older by year end are also permitted to make additional “catch-up” contributions of $6,000, for a total limit of $25,000 in 2019. The IRS just announced that the 401(k) contribution limit for 2020 will increase to $19,500 (plus the $6,000 catch-up contribution)